A year ago in Moscow, the Queensland state premier, an Australian Labor Party (ALP) politician named Anna Bligh, was threatened that if she didn’t give Oleg Deripaska what his United Company Rusal wanted from the state, he would punish the state treasury with the withdrawal of millions of dollars in bauxite mining royalties. Bligh has been doing her best to give him what he wants – and keep her deal secret.
The threat is recorded in a report to the state parliament which Bligh tabled after she returned from her trip to Moscow a year ago. The secret deal under current negotiation is the granting to Rusal of the Aurukun bauxite mining concession; this was admitted this morning by Bligh’s spokesman, Chris Taylor.

The trip, billed as a trade promotion mission to India, United Arab Emirates, and Russia, took Bligh and three state police bodyguards to Moscow and St. Petersburg from October 13 to 18. The most senior Russian official the premier met was the then Mayor Yury Luzhkov. The priority issues in her talks with Russian business groups were the Russian ban on kangaroo meat imports, and Rusal’s operations in Queensland.

The Rusal delegation was headed by Pavel Ovchinnikov of Rusal’s bauxite and alumina division. Ovchinnikov has had a noteworthy career putting pressure on governments to give Rusal bauxite and alumina on the terms it demands. In a UK High Court action in London in 2003, when a Rusal company was sued for breach of contract by a Guinean company, the High Court judge, Sir Raymond Jack, ruled that Ovchinnikov’s testimony to the court could not be believed. He also ruled that Rusal executives got their way in Guinea by a campaign of threats and lies. This was the first trial of Rusal’s business practices in an international court – Rusal lost.

In their meeting with Bligh, Rusal complained about the rising price of coal as an energy source for the Queensland Aumina Refinery (QAL), in which Rusal has a 20% stake; and the risk of higher taxes leading to the collapse of profitability for the refinery. Bligh said she would do what she could to introduce cheaper gas as an energy source in the state.

The Rusal executives then complained that they were being required to pay higher price for bauxite the company buys from Rio Tinto, charging that the reason was in “a letter from Rio advising of a 25% price increase in bauxite royalties paid to the Queensland Government.” Bligh’s assistant said there had been no increase in bauxite royalties.

Ovchinnikov then delivered his threat: “Rusal commented that they are keen for the additional bauxite supply from Chinalco’s Arukun [sic] bauxite project to come to market sooner rather than later as Rusal is effectively wholly reliant on Rio for bauxite supplies and feels this is a disadvantage. Rusal is concerned about reports that Chinalco is seeking to roll back the time scale for its development of the Arukun [sic] bauxite project. In the longer term Rusal may need to consider importing bauxite to QAL, effectively meaning the Queensland Government is foregoing bauxite royalties.”

Bligh responded that she had heard that Chinalco was discussing an investment in Deripaska’s group. The Rusal officials replied they could say nothing on the point. But they were emphatic in denying Rusal was thinking of selling out of the alumina refinery. “The company is committed to its QAL investment,” Bligh was told, “but reserves the right to speak out to government (as it does in other countries) to campaign for lower energy costs.”

None of this caught anyone’s attention. It might have disappeared from view altogether if Deripaska had not shown up in Australia six months later for a round of talks with Australians, who have so far not wanted to identify themselves, on topics that so far remain secret. That was in mid-April.

Then on June 30, Chinalco’s Hong Kong-listed subsidiary, the Aluminium Company of China (Chalco), announced it had terminated its agreement to develop the Aurukun bauxite deposit in Queensland, and would not build a new alumina refinery in the state. Abandoned also was a plan to expand the port terminal at Abbot Point, in northern Queensland, to export the large volumes of both bauxite and alumina which had been expected from Aurukun. Total promised investment lost – about $3 billion.

“The Aurukun Project has been hindered by various unfavourable factors to the extent that it cannot be implemented in accordance with the development agreement,” Chalco said in a filing to the Hong Kong Stock Exchange. It also told the Queensland government it was open to further discussions. Bligh’s planning minister, Stirling Hinchcliffe, said he expected negotiations to continue with Chalco, acknowledging that the terms of the Aurukun project would have to change because “both parties recognise that global conditions in the aluminium industry have deteriorated significantly since the original development agreement was signed in March 2007.”

Chalco’s chief executive Xiong Weiping announced to the Australian media: “We look forward to discussing new development and investment options for Chalco with respect to the Aurukun resources.”

What the Chinese didn’t reveal was that they were already in discussion with the Guinean Government and its mining minister, Mahmoud Thiam, on the terms and conditions for entering the bidding for large unmined bauxite concessions in the west African country.

The biggest of these, called Dian Dian, has been held by Rusal for several years, but remains undeveloped. Rusal is at risk of losing its development right for Dian Dian because it has failed to meet the use or lose terms of its Guinean concession agreement, according to Thiam. The company also faces a local court-ordered revocation of its Friguia bauxite mining and alumina refining agreement; and a claim for up to $1 billion in back tax, alleged customs fraud and other claims prepared by the mining ministry. Rusal denies fault, and demands taking the Guinean government claims and court orders to an arbitration tribunal in Paris.

How much did Deripaska know in advance of Chalco’s intentions to exit Queensland and relocate in Guinea? It is publicly acknowledged that he met with BHP Billiton’s (BHPB) chief executive Marius Kloppers during his April visit to Melbourne. It has been reported they discussed Deripaska’s invitation for BHPB to back a new alumina price fixing regime for global exports. Did they also talk about new bauxite mining projects in Australia? — Kloppers’s spokesman refuses to say.

Deripaska and Rusal aren’t saying what they would like to happen to Aurukun next. Australian industry analysts report that while Rio Tinto remains the dominant bauxite miner in the country, it is unlikely to want to pick up the A$3 billion tab the Chinese have left behind (the Australian dollar cited in this report is almost at parity at 98.3 US cents). There were 10 rival bidders for Aurukun in 2007. In addition to Rusal, they included BHP Billiton, Alcan and Comalco (now Rio Tinto), Alcoa, Brazil’s CVRD (now Vale), Hindalco of India, Hydro Aluminium of Norway, Mitsubishi of Japan, and Xstrata (now part of the Glencore group). Glencore is now a significant stakeholder in Rusal, and the global trader for Rusal’s aluminium exports.

Insiders have acknowledged that Rusal had wanted Aurukun for itself when the concession was tendered in 2007. BHP Billiton and Rio Tinto, the two Australian companies in the contest, convinced the government in Canberra that the record of Rusal’s business practices compiled by the US government, including its ban on an entry visa for Deripaska, were good enough reason to bar Rusal from taking control of the new mine. Rusal then attempted to improve its bidding chances by offering a partnership with Chalco. The Chinese said no – and went on to win the concession on its own.

As Rusal struggles with debts which brought it to the verge of bankruptcy a year ago, and attempts to optimize for the cost of energy and bauxite to produce its aluminium metal, Rusal’s global risk picture favours Queensland over Guinea; its global cost comparison favours Guinea over Queensland. The Australian state occupies the northeast corner of the island continent, and is popularly associated with the most lethal fish in the world, the stonefish, and the highest incidence of skin cancer in the country.

In the 2009 financial year, the state government took in A$3.4 billion in royalties from mine production worth more than A$48.1 billion – more mine revenue, more royalty income than were earned in any other Australian state. Bauxite, one of the principal minerals mined in Queensland, also draws a higher royalty rate than coal, iron-ore or other minerals – 17.1% of the value of production. Queensland is naturally keen on the cash, but has granted a lower royalty rate if the bauxite dug out of its soil is refined into alumina on Queensland territory instead of exported. One of the bones that stuck in Chalco’s throat was the requirement that it build a new billion-dollar refinery to process Aurukun’s bauxite into alumina.

That in turn has triggered controversy and opposition to the project among Australian conservationists and the aboriginal tribes who live in the area; the latter hold special title to the sub-soil resources. At the August parliamentary election, the federal Labor government lost the national vote, with the biggest swing against it recorded in Queensland. The prime minister Julia Gillard has hung on to power by making concessions to the Australian Greens Party, and to independent politicians representing constituencies which include northern Queensland.

Aurukun, on the west coast of the Cape York peninsula, lies in the Leichhardt electorate. In the August poll, the Labor Party incumbent was defeated by a swing of 8.4%, one of the most savage in the country. This is how a local publication has characterised the Aurukun mine and refinery project:

The election campaign revealed that ALP politicians like Gillard are viewed across the country as desperate, secretive, unprincipled. Just what combination of these Bligh represents can be guessed from her standing in the Queensland polls. She trails the parliamentary opposition leader by a large margin; two-thirds of her electorate say they are dissatisfied with her performance. If an election were held in Queensland today, Bligh’s career would be finished; the ALP would be trounced; and the Greens would advance in the balance of state power. The only thing Bligh can count on is time – the next poll is not due for 16 months.

Rio Tinto is the dominant bauxite miner and alumina refiner in Queensland. Output from its Weipa mine, also in the Leichhardt electorate, was running at a record 17 million tonne-annual level before the collapse of demand and prices in 2008. Rio Tinto also sells both bauxite and alumina to foreign buyers, who include Rusal. Australian exports of bauxite to Russia are kept secret in the Australian trade statistics because there is only one buyer. Rusal’s 20% stake in QAL cost A$460 million in 2005; but with Rio Tinto in control of the remainder of the shares, and no free float, the interest of potential buyers is limited. The valuation for Rusal to sell under debt or other pressures would require a discount. At their cheapest, Rusal’s investment in Queensland and its annual exports from the state are worth more than A$1 billion.

When Ovchinnikov threatened Bligh, that was the size of the purse doing the talking. It’s also the value of the secret she and Prime Minister Gillard need to keep, if they can.

On October 15, the Australian Ministry of Foreign Affairs and Trade (DFAT) disclosed in federal parliament to Senator Bob Brown, head of the Greens, that in the year since Bligh met Rusal in Moscow, the trade promotion agency Austrade “has formally met with UC Rusal four times in this past 12 months and has had additional contact via email and telephone as required. Formal meetings focused on: co-ordination and support for a Queensland State Government visit; UC Rusal business plans, including its Australian operations; planning for an UC Rusal visit to Australia. Additional contact has been consistent with that offered to any other international investor and focused on: assistance with visa enquiries; facilitating communication with relevant state government(s); provision of requested business matching information.”

In addition, Brown has asked the federal government to say what communication it has been having with Rusal’s local lobbyist, John Hannagan, who also serves as head of Rusal’s Australian company. Hannagan refuses to answer press questions about Rusal. He was particularly upset when a Jamaican newspaper disclosed that the Jamaican mining and industry minister, James Robertson, was given a Rusal tour to Australia in August. The Jamaican government is demanding Rusal commit to spending US$500 million in new investment in its Jamaican bauxite and alumina sector.

Austrade admits it is talking with Hannagan. “Yes. Austrade officials have met with Mr Hannagan,” the agency told the Australian Senate last week. “Austrade’s assistance to Mr Hannagan is consistent with that offered to any other international investor. Austrade has provided information relating to Rusal’s investments in Australia, facilitated contact with relevant state government(s) and provided information regarding Australia’s visa application process.”

The disclosure of Rusal’s insistent questioning about Australia’s visa application process, and the lobbying for visas by Hannagan, contrast with the straightforward handling of Russian visa requests in the Australian Embassy in Moscow — unless there is a problem of Deripaska’s right of entry. A former Australian Ambassador to Russia has disclosed that because the US has banned Deripaska, the Australian Government is obliged to follow suit unless it issues a special waiver of the ban. This can be based on commercial interests, the ambassador said.

Until the latest disclosure from Canberra, it had not been known that in addition to Deripaska, other Rusal executives may be having problems with Australian and US visas. This in turn exposes Australian security agency concerns about Deripaska and Rusal, which are worrying to the Russians, but which the Australian foreign ministry, its ambassador in Moscow, and Austrade are attempting to conceal.

Brown has also continued probing what Deripaska is attempting to do next in Queensland. The questions on notice in the Senate have been directed to “ask the Minister representing the Prime Minister—In 2010, which federal government officials, including the Prime Minister and the former Prime Minister, Kevin Rudd MP: (a) met with Mr Oleg Deripaska, the Chief Executive Officer of the Russian aluminium company, United Company RUSAL, or his representative; and (b) held discussions regarding the possibility of Russian participation in bauxite mining in Queensland, including the Aurukun project recently abandoned by Aluminium Corporation of China Limited (CHALCO).”

A source at BHP Billiton has revealed that when approval of Rusal’s purchase of the minority stake in QAL came up for review by Australia’s Foreign Investment Review Board (FIRB) in 2004-2006, the then prime minister John Howard canvassed for their reaction BHPB, Rio Tinto, and the Queensland premier, Bligh’s patron Peter Beattie. A political associate of Howard’s adds that the prime minister’s personal approval was necessary to overcome the black ball from the US.

The Rusal lobbying strategy, says the Howard associate, was to make sure “the FIRB people didn’t properly get all the information that was available to other agencies of the Áustralian government, nudge nudge wink wink.”

Brown’s questioníng puts the government in Canberra on the spot to disclose whether Deripaska is repeating himself, this time with the objective of taking over the Aurukun mining concession abandoned by Chalco. Asked if Austrade is aware of plans by Rusal to expand in Australia, the Austrade disclosure to the Senate admits the agency knows more than it will reveal to parliament. “Information provided to Austrade by overseas investors is held on a Commercial-in-Confidence basis,” the agency says.

Austrade has an unusual status – it is both a government agency funded by public funds, and also a consultancy which works for private client fees. When it operates as a consultant, Austrade officials may sign confidentiality undertakings. “Commercial-in-Confidence basis” may mean that Austrade cannot reveal to the Senate what it is doing on the Rusal payroll. Austrade’s Moscow agent Dan Tebbutt was asked last week “what retainer, consultancy, or commercial agreements have been signed between Rusal, Austrade, or other elements of the DFAT and Austrade group for which you exercise supervisory and executive functions, individually and severally?” He was also asked “what services have Austrade or its employees and associates, including consultants, been paid to perform by companies of the Rusal group or companies controlled by Oleg Deripaska?”

He answered: “we refer you to previous correspondence and documents sent to you and advise we have nothing further to provide.”

On October 18 Bligh was asked questions about what she and her associates know about Deripaska’s interest in taking Aurukun, and what contact they have had with Deripaska, other Rusal executives, or the lobbyist Hannagan on this project. By the close of the week, Bligh had not replied.

On October 23, her spokesman, Chris Taylor, was cautioned that the non-response may be reported as Bligh’s refusal to reply. On October 25, Bligh confirmed officially through her spokesman that Rusal has opened negotiations for the Aurukun bauxite concession. According to Bligh’s spokesman, “Minister for Mines and Energy and Trade Stephen Robertson met with John Hannagan and Geoff Blatch on 25th August.” Blatch is general manager of Rusal Australia; Hannagan is chairman of the company. Asked what ongoing communications there are, and what they are focusing on, the spokesman said: “Rusal approached the Queensland Government to discuss their interest in possible future bauxite resources from western Cape York.”